Selling an inherited property can be a complex process involving legal, financial, and emotional considerations. Understanding the steps and legal and tax implications is crucial for a smooth transaction.
I have gone to great lengths to help you understand the process in an easy-to-understand fashion:
- The detailed process for selling an inherited property.
- Comprehensive information on legal and tax implications.
- What to do after you sell an inherited property
- Practical advice from real estate professionals.
With thirty-eight years of experience as a top Realtor, I know that this situation most often arises when a parent passes away. You will need to consider how to sell a home after a parent’s or relative’s death.
Let’s examine the steps and important considerations in selling an inherited home.
Steps to Sell an Inherited Property
1. Determine Ownership Status
- Confirm Sole or Co-Ownership: Review the will or trust documents to confirm whether you are the sole heir or the property is co-owned with other heirs. If there are multiple heirs, decisions about the sale must be made collectively unless a court determines otherwise.
- Check the Title and Legal Documents: Obtain a copy of the property deed and title to ensure clear ownership. Verify if there are any existing liens or encumbrances on the property.
2. Probate Process
- File the Will with Probate Court: Submit the deceased’s will to the probate court in the county where the property is located. The property will be distributed according to state intestacy laws if there is no will. See Selling a House in Probate for helpful advice.
- Appoint an Executor or Administrator: The court will appoint an executor (if named in the will) or an administrator (if there is no will) to manage the estate, including the property sale.
- Obtain Court Approval: The executor or administrator must get the court’s permission to sell the property. This may involve a court hearing and notifying all interested parties.
3. Get Property Appraised
- Time of Death Appraisal: When getting an appraisal, real estate capital gains must be calculated at the time of death. This will be used as your stepped-up basis and must be completed within six months of death. It’s referred to as a time of death appraisal.
- Hire a Certified Appraiser: An independent appraiser will evaluate the property to determine its fair market value. This appraisal is essential for setting a sale price and tax purposes.
- Use the Appraisal for Pricing: Set a competitive sale price based on the appraised value. Overpricing can delay the sale, while underpricing can result in a financial loss. An exceptional Realtor can also provide a comparative market analysis.
4. Settle Outstanding Debts and Liabilities
- Pay Off Mortgages and Liens: Ensure all mortgages, home equity loans, and other liens on the property are paid off. This is typically done from the estate’s funds. Learn more about selling a house with a mortgage.
- Clear Estate Debts: Settle any debts the deceased owed that are tied to the estate, such as medical bills or credit card debts.
5. Hire a Real Estate Agent
- Select an Experienced Agent: I recommend you choose a real estate agent with experience selling inherited properties. They will understand the unique challenges and legalities involved. The best agents also know how to sell a house with the least headaches.
- Utilize Their Expertise: The agent will help market the property, set the right price, negotiate with buyers, and navigate legal requirements. The best agents can also refer you to an experienced real estate attorney. I always recommend an attorney in any real estate transaction.
6. Prepare the Property for Sale
- Clean and Repair: Thoroughly clean the property and make any necessary repairs. Address any visible issues that could deter buyers.
- Stage the Property: Consider home staging tips to make the home more appealing to potential buyers. This can involve rearranging furniture, adding décor, and making the space look inviting.
- Minor Renovations: Small updates, such as a fresh coat of paint, new fixtures, or updated landscaping, can increase the property’s value and attractiveness. I often recommend these improvements to my clients; your agent should do this for you.
7. Market the Property
- List on Multiple Platforms: Ensure the property is listed on popular real estate websites, local MLS, and other relevant platforms.
- Professional Photos and Descriptions: High-quality photos and a well-written description can attract more potential buyers. Highlight unique features and recent upgrades.
8. Negotiate Offers
- Evaluate Offers: Review all offers with your real estate agent. Consider not just the price but also the terms and contingencies.
- Negotiate Terms: Work with your agent to negotiate the best possible terms, including the sale price, closing date, and any repairs or concessions.
9. Close the Sale
- Complete Paperwork: Ensure all required documents are signed and submitted. This includes the sale contract, title transfer, and any disclosures.
- Transfer Ownership: Work with a title company or attorney to ensure the ownership transfer is legally binding and recorded.
- Receive Sale Proceeds: Once the sale is finalized, the proceeds will be distributed according to the will or trust or divided among the heirs.
Legal and Tax Implications
Capital Gains Tax
- Definition: Capital gains tax is levied on the profit from selling an asset, in this case, the inherited property.
- Calculation: The gain is the difference between the sale price and the property’s stepped-up basis, which is the market value at the time of inheritance. For example, if the property was worth $300,000 at inheritance and sells for $350,000, the gain is $50,000.
- Exemptions: If the property is sold within a short period after inheritance, there might be minimal gain due to the stepped-up basis. Additionally, suppose you move into the property and make it your primary residence for at least two of the five years before the sale. In that case, you might qualify for a capital gains exclusion of up to $250,000 ($500,000 for married couples).
Estate Tax
- Definition: Estate tax is imposed on the total value of the deceased person’s estate before distribution to the heirs.
- Threshold: As of recent laws, estates valued under $11.7 million (subject to change) are exempt from federal estate taxes. However, some states have their estate taxes with lower thresholds.
- Responsibility: The estate pays the estate tax before distributing assets to the heirs.
Inheritance Tax
- Definition: Inheritance tax is levied on the recipients of the inherited property.
- State Variance: Only a few states impose inheritance taxes, such as Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The tax rate can vary based on the relationship to the deceased and the amount inherited.
- Exemptions: Spouses and sometimes children may be exempt from paying inheritance tax, depending on the state laws.
Handy Lists for Actions and Documents
Actions Needed
- Determine Ownership Status: Verify if you are the sole owner or co-owner of the property.
- Navigate Probate Process: File the will and get court approval for the sale.
- Get Property Appraised: Hire an appraiser to determine the property’s market value.
- Settle Debts and Liabilities: Clear any mortgages, liens, and estate debts.
- Hire a Real Estate Agent: Choose an agent experienced in selling inherited properties.
- Prepare and Market the Property: Clean, repair, and list the property for sale.
- Negotiate and Close the Sale: Evaluate offers, finalize the sale, and transfer ownership.
Documents Required
- Death Certificate: Proof of the decedent’s passing.
- Will and Probate Documents: Legal documents proving your right to sell the property.
- Property Deed and Title: Documents proving ownership.
- Appraisal Report: Valuation of the property for pricing and tax purposes.
- Tax Documents: Include estate, inheritance, and capital gains tax records.
- Mortgage and Lien Release Papers: Proof that all debts tied to the property are cleared.
- Sale Contract and Closing Documents: Final paperwork required to complete the sale.
Advice from Real Estate Professionals
1. Consult an Attorney
1. Consult an Attorney- Hire an Estate Attorney: An estate attorney can help you navigate the probate process, resolve title issues, and meet all legal requirements.
- Compliance with Laws: They will ensure you comply with state and federal laws regarding the sale of inherited property.
Debbie Drummond of The Las Vegas Luxury Home Pro recommends an experienced real estate lawyer for these transactions.
It’s really important to have a real estate attorney on board when selling a home you’ve inherited. The legal and financial aspects can get complicated, so having an attorney by your side is key. They ensure all the necessary paperwork is done correctly and submitted on time, which helps avoid any mistakes that could slow down the sale.
In addition to that, they can help prevent any disagreements between family members by ensuring everyone’s concerns are heard and addressed fairly. On top of that, a real estate attorney can provide valuable advice on tax matters and assist in dealing with any outstanding debts or liens on the property. Their expertise makes the whole selling process smoother and gives you peace of mind, knowing that your interests are being looked after every step.
2. Work with a Certified Public Accountant (CPA)
- Tax Advice: A CPA can provide detailed advice on tax liabilities, deductions, and strategies to minimize taxes.
- Plan for Obligations: Understand your financial responsibilities and plan accordingly to avoid unexpected tax bills.
3. Choose the Right Real Estate Agent
- Experience Matters: Select an agent with a proven track record in handling inherited properties. They will be familiar with the additional steps and paperwork involved.
- Maximize Sale Price: An experienced agent will help you set the right price, market effectively, and negotiate the best terms.
Paul Sian of United Real Estate Home Connections offers helpful advice, which I completely endorse.
When it comes to picking the right real estate agent to work with, sellers need to realize that agents have different specialties and experience levels. While some agents will happily take any listing or buyer on, that does not mean they are the best qualified to do so. Instead, someone selling an inherited home needs to find out from a prospective agent what their experience is with that and what they know about the process. Selling an inherited home is a bit more complex than selling other homes.
4. Consider a Financial Advisor
- Investing Proceeds: A financial advisor can guide you on how to invest the proceeds from the sale wisely.
- Long-Term Planning: They can help you plan for your future financial goals, ensuring that the inheritance benefits you in the long run.
Things to Do After Selling an Inherited Property
1. Manage Tax Obligations
Understand Capital Gains Tax: As I mentioned, you may be subject to capital gains tax when you sell an inherited property. This tax is calculated based on the difference between the sale price and the property’s fair market value at the time of inheritance.
- Determine the Step-Up in Basis: The “step-up” in basis refers to adjusting the property’s value to its fair market value at the date of the decedent’s death. This step-up can significantly reduce the taxable gain.
- Report the Sale: You must report the sale on your tax return, using Form 8949 and Schedule D of Form 1040 to calculate and report capital gains or losses.
Pay Estate Taxes: Depending on the estate size, you might need to pay federal or state taxes. It’s crucial to consult with a tax professional to understand your obligations and ensure compliance with all tax laws.
2. Divide Proceeds Among Beneficiaries
Review the Will or Trust: The distribution of sale proceeds should be guided by the deceased’s will or trust. The document will specify how the assets are to be divided among beneficiaries.
Communicate with Beneficiaries: Maintain clear and open communication with all beneficiaries throughout the process. Transparency is key to avoiding misunderstandings and disputes.
- Provide Detailed Accounts: Ensure that all beneficiaries receive detailed accounts of the sale, including the sale price, expenses, and net proceeds.
Legal Assistance: Consider hiring an attorney to help divide the proceeds. This can help ensure the distribution is handled fairly and according to the law.
3. Close Out the Estate
Settle Outstanding Debts and Expenses: Before distributing the proceeds, ensure that all outstanding debts and expenses related to the estate are settled. This includes paying off any remaining mortgage, property taxes, and legal fees.
Final Tax Returns: File the final income tax return for the deceased. This return covers the period from the beginning of the tax year until the date of death.
Distribute Remaining Assets: After settling debts and expenses, distribute any remaining assets according to the will or trust. This may include personal belongings, financial accounts, or other property.
Obtain Estate Closure Documentation: Once all assets are distributed and obligations are met, documentation confirming the closure of the estate must be obtained. This might include a final accounting and receipts from beneficiaries acknowledging their inheritance.
Frequently Asked Questions (FAQs)
Q: How long does the probate process take?
A: It varies by state but typically takes several months to over a year.
Q: Can I sell an inherited property before probate is complete?
A: Generally, no. You need court approval to transfer ownership.
Q: Are there ways to minimize capital gains tax?
A: Yes, living in the property for two years may allow for exclusions. Consult a CPA for details.
Q: What if the property has multiple heirs?
A: All heirs must agree to the sale. Alternatively, one heir can buy out the others.
Q: Do I need a real estate agent?
A: It’s highly recommended. An agent’s expertise can streamline the process and maximize your profit.
Conclusion
Selling an inherited property involves several critical steps, legal hurdles, and tax implications. Please contact me if you have an inherited home to sell in the Metrowest, Massachusetts area. I would welcome the opportunity to be interviewed.
About the Author: Bill Gassett, a nationally recognized leader in his field, provided the above real estate information on selling an inherited property. Bill has expertise in mortgages, financing, moving, home improvement, and general real estate.
Learn more about Bill Gassett and the publications in which he has been featured. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. For the past 38+ years, Bill has helped people move in and out of Metrowest towns.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge Massachusetts.
